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Published: Fri, 02 Feb 2018

Origin of consideration has been long rooted

For a contract to be legally enforceable there must be consideration. The origin of consideration has been long rooted in English law under the argument that this doctrine represents the adoption by English law that only bargains should be enforced. [3] In modern law, this concept is still very much relevant and the courts will look into the presence of consideration in deciding as to whether a party has the right to sue another party.

In the mentioned situation, the contract took place between two parties, which are Goodworks and Buffy plc. The said contract was made regarding the construction of a new factory on a land owned by Safeworks, a company related to Goodworks. Therefore, it must be decided as to whether the contract is enforceable. To do this, sufficient consideration must be established. Buffy plc had agreed to construct a new factory within a year in return for the payment of £10,000,000. Hence, the ‘act or forebeareance’ involved here is Buffy plc’s promise to construct the factory, and Goodworks promise to pay Buffy plc will be the consideration since it is a detriment for Goodworks. This is known as ‘executory consideration’, since it is a promise for a promise.

Since consideration is present, both parties are able to seek legal action against one another if either one breaches their obligation in the contract. This means that if Buffy fails to properly construct the factory within the specified time frame, Goodworks can sue him, and if Goodworks fails to pay Buffy the due amount, Buffy is also entitled to sue. This seems to be very clear cut and straightforward, since the interests of both parties seem to be well taken care by the law. The real problem arises when the interest of another third party is at stake, and this third party is not an active participant in the said contract.

The main issue that crops up in this situation is the fact that Safeworks is a third party in this contract, and is consequently said to be not privy to the contract. This concept is guarded by the doctrine of privity. The essence of this doctrine is the idea that only those who are parties to a contract can have rights or liabilities under it. [4] It is one of the most fundamental characteristics in English law. An example of this doctrine in motion can be seen in Beswick v Beswick (1968) [5] , where the plaintiff failed in her actions as she was not privy to the contract. Despite criticisms of this doctrine, Professor Treitel has stated that the “most significant doctrinal development in English contract law in the twentieth century was no doubt the outcome of what I shall call the battle over privity”. [6] The outcome of this battle was the enactment of the Contracts (Rights of Third Parties) Act 1999. The main issue that needs to be addressed under this doctrine in this situation is firstly whether or not a third party can acquire any rights under the contract, and secondly whether or not the law can impose obligations and liabilities upon him.

The general misconception regarding contracts is that it usually involves only two parties. However, this is indeed a mistaken belief as contracts are usually interlinked in many complex ways. A commercial example of this can be seen in Junior Brooks Ltd v Veitchi Co Ltd (1983) [7] . In this case, the defendant was actually a subcontractor employed by one of the parties and was a third party to the contract. Although the defendant was not directly connected to the contract, it was ruled that there was still sufficient proximity between them to enable the plaintiff to sue.

Professor Ibbetson had stated that ‘the rule that a third party could not enforce rights arising under a contract has been a feature of English law since the thirteenth century’. [8] It was only in the middle of the nineteenth century that common law judges had reached a decision that no one may be entitled to or bound by the terms of the contract to which he is not an original party to. The landmark case for this was Tweddle v Atkinson (1861) [9] , where the court decided that the groom could not sue for the promised sum of money and justified their decision by claiming that the promisee did not provide any consideration.

The doctrine of privity was reaffirmed by the House of Lords in the case of Dunlop v Selfridge (1915) [10] . In this case, the plaintiff tried to sue the defendant, who was not involved in the contract involving Dew & Co and Selfridge, the courts decided that an action in law could not be pursued since the plaintiff was not a party to it and Lord Haldane stated that “only a person who is a party to a contract can sue on it”. The importance of these two said cases are that they clearly state that third parties would be unable to derive any contractual rights even if it was clearly the intention of both the parties in the contract to confer the said benefits to the third party. Henceforth, the general rule is that only a party to a contract can sue or be sued under it.

The rationale behind this doctrine of privity is based on the doctrine of consideration. The courts claim that since the consideration did not move from the promise, he should not be able to sue for his rights since there were none to begin with. There is also the rule that the burden of a contract should never be placed on a third party who had not been an active part in the contract as this would be ‘serious invasion of the liberty of the individual …if the parties to a contract agreed that a third person should run a marathon’. [11] 

Situation A

Applying these facts to the mentioned situation, it is clear the Safeworks is not involved in the contract but it owns the land in which the factory will be built on. The contract also states that Safeworks would be receiving the compensation for any delays in construction, but it does not mention anything about the position of Goodworks. This is where difficulties arise as based on the general rule; Safeworks would be unable to receive the compensation as it does not have a contract with Buffy and is hence not privy to the contract. Safeworks will not be entitled to receive the benefit of the contract, regardless of the fact that the contract was made with the intention to benefit it. This would be problematic, since both Goodworks and Safeworks seem to be unable to claim any damages for their respective losses. The predicament faced in this situation is similar to the situation in Linden Garden Trusts v Lenesta Sludge Disposals (1994) [12] .

More problems arise as although the construction was completed on time, the building was poorly constructed and massive repair work must be undertaken to repair the building. The key issue that needs to be tackled is whether both Goodworks and Safeworks have the potential to claim damages from Buffy due to Buffy’s breach of contract. Since Goodworks is a party to the contract and is therefore privy to it, Goodworks can sue Buffy. However, since the factory was built on a land owned by Safeworks, it is quite apparent that Goodworks had not suffered a consequential amount of damage. Therefore, Goodworks would not have any grounds to sue Buffy.

It was only in the early case of Dunlop v Lambert (1839) [13] that it was first held that there is an exception to the rule that a plaintiff may only recover damages for loss which he himself suffered. [14] However, the ratio for this was unclear. In the Albazero (1977) [15] , this exception was invoked and became known as the Albazero exception. Then, in Radford v De Froberville (1978) [16] the courts decided that although the plaintiff suffered no losses for the wall that he had wanted to built for his tenants, they found that he had performance interest and that the court was protecting this interest when they awarded him the cost of rectifying the wall. In Jackson v Horizon Holidays (1975) [17] , Lord Denning took a more radical approach and held that the plaintiff could also possibly recover damages in respect of losses suffered by his family members. However, his view was deemed to be incorrect by the House of Lords in Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd (1980) [18] and stated that such situation could only occur under a special situation which would call for a special treatment. This statement by the House of Lords was extremely crucial, considering that if Lord Denning’s approach were to be relied on, this would lead to floodgate arguments as most third parties could be easily persuaded to pursue a legal action.

As all these cases led to confusions, inciting the House of Lords to settle this in the Linden Garden’s case and St Martin’s Propery v Sir Robert McAlpine (1994) [19] , where Lord Griffith held that it was unacceptable that the recovery of nominal damages for breach of contract was dependent upon the plaintiff having a proprietary interest in the subject matter of the contract. This was again reconsidered in Panatown v McAlpine Construction Ltd (2001) [20] where the members of the House of Lords thought that the decision in Linden Gardens had been correctly made and reaffirmed that a contracting party cannot sue and recover damages in respect of a loss suffered by a third party. Therefore, in Goodworks’ situation, it is not possible for Goodworks to sue Buffy for losses suffered by Safeworks.

The party that is essentially affected by the poor quality of construction is Safeworks, as it is Safeworks’ land and the contract had stated that Safeworks would be the one receiving the compensation for any delays in construction. However, Safeworks is not privy to the contract and would not be able to claim its rights.

Safeworks, despite not being privy to the contract can still start a legal action through the common law exception or through the exception by statute. It would be possible for Safeworks to rely on the decision made in Darlington Borough Council v Wiltshier Northern Ltd (1995) [21] . It was decided in this case that a third party to a building contract, where it was the parties’ intention that the contract was for the benefit of the third party who was assigned the contracting party’s rights against the building contractor, is able to sue the building contractor for substantial damages for defects in the building work. This means that if it can be successfully proven that both Goodworks and Buffy had intended that the contract was to benefit Safeworks, Safeworks would then able to sue Buffy for the cost of the massive repair work and for the £10,000 promised per month where the construction had failed to be completed after a year.

Safeworks can also opt to rely on the exception provided by the Contracts (Rights of Third Parties) Act 1999, which is the principal source of the law relating to third party rights of action. The main aim of this act is to confer a benefit on the third party should the need of it arise and is only applicable to those whom the parties to the contract had intended to confer an enforceable legal obligation [22] . The 1937 Law Revision Committee proposed a simple statute which required parties to expressly state that they intend to confer contractual rights on third parties. However, in English law, anything that can be done expressly can also be done impliedly, leading to the formation of this Act. Section 1(1) and (2) provides that:

Subject to the provisions of this Act, a person who is not a party to a contract (a ‘third party’) may in his own right enforce a term of the contract if –

The contract expressly provides that he may, or

Subject to subsection (2), the term purports to confer a benefit on him.

Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

The effect of this Act is that third parties are able to acquire contractual rights if it is expressly stated in the contract, or where the contract purports to confer a benefit on him unless as a matter of construction it is apparent that the parties did not intend the third party to get an enforceable right. [23] In Safeworks’ situation, the company needs to prove that the contract had expressly stated that Safeworks would be able to acquire contractual rights. If this was not done, Safeworks will need to prove that both the original parties to the contract had indeed intended that the benefit of the contract would be passed to Safeworks. The downside to the usage of this Act is that the proving of intention could also work as a double-edged sword. This is because the terms of the contract has expressly stated that the intention of the parties was to provide compensation in the event of any delays only, and did not specifically state any terms involving the quality of work and matters regarding the costs of repairing the factory. Safeworks would be threading on dangerous grounds here as its claim for losses suffered due to the delay could swing both ways. The courts could decide that the said contract had been intended to confer rights to Safeworks or it could also decide that the intention of the parties was to compensate only for delays.

Situation B

In the second situation, Goodworks suffers a direct loss, as it is unable to maintain production of its automative parts as it had counted on receiving parts from the new factory of Safeworks. It is obvious hereon that Goodworks can sue since it is a party to the contract. Goodworks can sue Buffy for the pecuniary losses suffered and claim damages. The only limitation to this is that a claimant cannot recover damages in respect of a loss which is too remote a consequent of the defendant’s breach of contract. [24] 

The necessity for this rule arose because claims for consequential losses usually involve significant amounts and the law must draw a line at some point to curb these claims. Therefore, the law has set out the difference between a loss that is not too remote and one that is too remote. The leading case of this is Hadley v Baxendale (1854) [25] . It laid down the rules that the losses are recoverable if they flow naturally from the breach and that there must have been knowledge or if it had been in the contemplation of both the parties at the time of entry into the contract. This issue was strongly debated in the cases of Victoria Laundry (Windsor) v Newman Industries (1949) [26] and Parsons (Lifestock) Ltd v Uttley Ingham & Co Ltd (1978) [27] . Despite the arguments, certain conditions remain clear. Firstly, the courts will not look into the nature of the breach, and the recoverability of damages will not depend upon the nature of the loss suffered. The courts are more concerned about the knowledge of the parties at the time the contract was made.

Therefore, it can be inferred from here that in order to establish that Goodworks’ consequential loss were not too remote, Goodworks must prove that the losses it suffered must have been known or had been in contemplation of Buffy at the time of the contract. The decision made in Balfour Beatty Construction (Scotland) Ltd v Scottish Power plc (1994) [28] stated that if the losses were not in contemplation of the party in breach, the claim would not be successful. This was further reinforced in Jackson v Royal Bank of Scotland (2005) [29] . A more recent example of the application of this rule can be seen in Transfield Shipping Company Inc v Mercator Shipping Inc (2008) [30] . It is quite evident that Buffy would have foreseen at the time the contract was made that Goodworks’ productions of its automative parts would be affected by the poor quality of the factory it had built. Therefore, Goodworks’ claim for consequential losses is not too remote and Goodworks should be able to succeed in its claims as it has satisfied all the rules laid down in Hadley v Baxendale.

Situation C

In the third situation, Goodworks is sold off to a competitor of Safeworks, whom which agreed with Buffy to absolve it of all liabilities under their contract in exchange for Buffy’s payment of £10,000 to Goodworks. Based on this contract, Goodworks can no longer sue Buffy as it has relinguished all rights relating to it. The pressing question here is whether the terms of this contract would affect Safeworks’ ability to sue based on the common law or the Contracts (Rights of Third Parties) Act 1999. There is no apparent case laws relating to its position in common law, and therefore it can be assumed that the right to sue still exists, as long as it can be proven that it satisfies all the said requirements as mentioned earlier on.

As for Safeworks’ ability to rely on the 1999 Act, it is entirely dependent on the terms of the contract between Goodworks and Safeworks’ competitor. If it had been expressly stated in the terms of the contract that the new owner of Goodworks and Buffy can vary the terms of the original contract and remove Safeworks’ right to sue without Safeworks’ agreement, Safeworks would be unable to invoke the right of action under the 1999 Act. If the new contract remains silent upon this issue, it would be subject to Section 2 of the 1999 Act. This section states that:

2 (1) Subject to the provisions of this section, where a third party has a right under section 1 to enforce the term of the contract, the parties to the contract may not, by agreement rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent if –

The third party has communicated his assent to the term to the promisor

The promisor is aware that the third party has relied on the term

The promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it.

Therefore, based on this section it is clear that if there had been no express terms stating that they would have the right to absolve Safeworks’ right to sue in the contract between Buffy and the new owner of Goodworks, the new owner and Buffy would have no right to vary the terms of the contract and to completely remove Safeworks’ ability to sue Buffy.

Conclusively, the entire situation involving Goodworks, Safeworks and Buffy falls under the doctrine of privity, which is one of the unique features of English law. The general rule of privity would not allow Safeworks, who is a third party to the contract to sue Buffy for its losses. Goodworks on the other hand, in spite of being a party to the contract cannot sue as it had not suffered any loss. However, the law has alleviated the severity of this doctrine by introducing several exceptions to this rule and had enacted the Contracts (Rights of Third Parties) Act 1999, and these exceptions has granted a right of action to the third parties, provided they satisfy the necessary requisites.

In the mentioned situation, since Goodworks is unable to sue, Safeworks can sue for compensation on behalf of Goodworks, as it had suffered losses due to the poorly constructed factory that Buffy had built on its land. Safeworks can sue under both the common law and also by virtue of the Contracts (Rights of Third Parties) Act 1999. Goodworks, however, did suffer losses as it was unable to maintain production of its automative parts due to the subpar condition of the factory. Thus, Goodworks can sue Buffy for compensation, as the loss is not too remote and it satisfies the requirements in Hadley v Baxendale. As for the third situation, the new owner and Buffy can only remove Safeworks’ right to sue if it had been expressly stated in the original contract. If it is not stated, it would fall under Section 2 of the 1999 Act. This Act states that the parties cannot remove the third party’s right of action without an agreement by the third party. Hence, Safeworks would still be entitled to sue Buffy for its losses.

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